Red tape in the UK’s financial industry can help “flush out” excessive profits, but should not cap the amount that banks earn, the boss of the Bank of England has said.
Andrew Bailey told City bosses that arguing for less regulation was “unhelpfully reductive”, but that the central bank was open to tweaking the existing rules.
The governor said in a speech to business leaders at Mansion House: “We strongly believe that financial stability is a prerequisite of economic growth.
“However, we should never say that therefore every one of our rules and regulations is perfectly formed.
“That will not be the case. But, likewise, to simply argue for less regulation is unhelpfully reductive.”
Discussing capital requirements for banks – the amount of cash they must hold – Mr Bailey said it was an important rule which means banks can absorb losses and protect people’s deposits when things go wrong.
Rules have been in place to avoid excessive profit-taking and maintain stronger buffers since the 2008 financial crisis, but in more recent years, banks have been generating higher earnings.
Mr Bailey stressed: “There should not, to be clear, be a cap on returns set by regulators.
“That is a matter of commercial strategy for firms, and good regulation should help markets to flush out supranormal profits by reducing barriers to entry.”
But he said returns should exceed the amount of capital reserves a bank holds for the sake of financial stability, adding: “Regulation must therefore strike the right balance.”
He told City leaders that the central bank was willing to question how well red tape was working, amid arguments from some businesses and MPs that regulation in the financial industry could be holding back economic growth.
“We are very much open to simplifying and adjusting regulations where needed,” he asserted.
“But, doing so must contribute to sustaining a healthy banking system which can support and foster stronger growth in the economy.”
Last month, Conservative leader Kemi Badenoch said the burden of red tape has become too high since the financial crisis and has created a risk averse culture in Britain’s financial industries.
She called for an adjustment to capital requirements for banks with the aim of releasing £450 billion for investment.
